DEALBOOK; Japan Widens Inquiry Into Insider Trading

By HIROKO TABUCHI and PETER LATTMAN; Hiroko Tabuchi reported from Tokyo and Peter Lattman from New York.

Published: August 3, 2012

TOKYO - A government investigation into insider trading here has extended onto the trading floors of some of Wall Street's largest companies, including Goldman Sachs, UBS and Deutsche Bank.

Regulators are scrutinizing suspicious trading activity ahead of at least 12 public offering announcements over the last three years, said Tsutomu Okubo, head of the ruling Democratic Party's financial affairs committee. The committee has been working with regulators to stiffen insider trading laws in Japan.

Among the trades being investigated are those made by Goldman clients who bet against All Nippon Airways just days before the airline's stock offering last month. A company's share price typically drops when a new share issuance is announced.

Mr. Okubo's push for more disclosure comes as Japan's Securities and Exchange Surveillance Commission is set to discipline Nomura on Friday for mismanaging confidential information on share offerings. The commission is expected to issue an order and call for fundamental changes in the way the company, which is based in Tokyo, handles information, the Nikkei business daily reported.

Two top executives of Nomura, Japan's largest investment bank, have already resigned after acknowledging that in three cases, its sales staff tipped off its mutual fund customers about stock offerings that the bank was handling for its corporate clients.

The Nomura scandal has further undermined faith in Japanese stock markets, experts say, which remain some of the world's most depressed after the global financial crisis.

''The reckless pursuit of short-term profits by a handful of actors is destroying the reputation and value of the entire market,'' said Mr. Okubo, a former managing director at Morgan Stanley.

The hard line taken by Japanese regulators comes as governments across the globe continue to crack down on insider trading. In Britain, the Financial Services Authority has become far more aggressive, bringing a rising number of insider trading cases, while federal prosecutors in Manhattan have charged at least 70 people with illegal trading over the last three years.

In Japan, Mr. Okubo said that his committee was interested in trades by funds, brokerage firms and asset managers ahead of a string of public share offerings since 2009. The committee obtained data from the Tokyo bourse on short-selling activity - in other words, betting against stocks - ahead of a list of public offerings. Mr. Okubo said he had forwarded that list to the Securities and Exchange Surveillance Commission.

Among offerings on the list is the $2.6 billion issuance announced by All Nippon Airways on July 3. Filings made with the Tokyo bourse show short-sale positions on the stock taken out in the name of Nomura from June 25, eight days before the announcement, and in the name of Goldman from a day before.

In approximately three years before the ANA offering, neither Goldman nor Nomura made filings of short-sale positions on ANA shares. Trading volume of those shares jumped ahead of the issuance announcement, reaching a three-month high the day before, according to separate Tokyo Stock Exchange data.

Both Goldman and Nomura, who were underwriters for All Nippon's issuance, confirmed that the trades had been undertaken on behalf of clients but declined to comment further. They denied that information on the issuance could have leaked from their investment banking divisions to those clients.

Also on Mr. Okubo's list are short positions taken in the name of Deutsche Bank and UBS on shares of Nippon Sheet Glass before its $500 million stock offering, announced on Aug. 24, 2010. Deutsche and UBS both first filed short positions, likely on behalf of clients, starting on Aug. 6, according to Mr. Okubo and the exchange filings. Neither bank filed short positions on Nippon Sheet Glass in the year before that, the data shows. The banks declined to comment.

Analysts warn against assuming that all shorting activity made before a public offering is based on insider information. ''It is not rocket science to pick out companies that are in danger of issuing equity,'' Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, wrote in a note to clients in May.

''Shorting stocks on credit analysis that indicates that an offering is in the offing is a legitimate - and valuable - part of the pricing mechanism of financial markets,'' Mr. Smith said. ''What is not legitimate is trading on leaks of nonpublic information.''

But Mr. Okubo insisted that many of the trading patterns were suspicious. He said it was crucial that regulators got to the bottom of who was behind the short-selling leading up to recent offerings, much of which remained unaccounted for.

Nomura has not faced any insider trading charges because, unlike the United States, Japan does not punish tipsters as long as they do not trade on the information. But a string of the bank's clients have decided to take their business elsewhere after the scandal, prompting the bank to reshuffle management and promise an overhaul of its internal compliance in a bid to regain investor confidence.

Nobutoshi Yamanouchi, a partner at the Tokyo branch of the law firm Jones Day, said financial regulators needed badly to convince global investors that they had the power to break into the cushy inner circle of Japanese finance and root out insider trading. The extent of regulators' actions against Nomura would be crucial, he said.

''They need to be able to show that they can make Japanese markets attractive for everyone again, not just for a select group of insiders,'' Mr. Yamanouchi said.

This is a more complete version of the story than the one that appeared in print.

PHOTO: Tsutomu Okubo, head of the Democratic Party's financial affairs committee, said regulators were scrutinizing suspicious trading. (PHOTOGRAPH BY ROBERT GILHOOLY/BLOOMBERG NEWS)